© The Open Polytechnic of New Zealand 171338/Appendix71338 Managing ChangeAlternate AssessmentCase studyInstructionsThis case study is designed to be used in conjunction with your response to thefinal exam for this course. Carefully read and understand the case study beforeresponding to the questions.Lego: the rebuild of a brick businessEvery second, seven boxes of Lego are sold. For every person in the world, there are62 Lego bricks. There are more Lego ‘mini-figures’ than there are real people on theplanet.From its founding in 1932 until 1998, Lego never posted a financial loss. The DanishChristiansen family founded and managed the company in-house for over seventyyears. By 2003 it was in trouble. Sales were down 30% year-on-year and it was$800m in debt.An internal report revealed Lego hadn’t added anything of value to its portfolio for adecade. External consultants advised diversification. They said the brick had beenaround since the 1950s, they said it was obsolete. They said Lego should look toMattel, a toy company whose portfolio was broad and varied. Lego took their advice:in doing so it almost went bust. It introduced jewellery for girls, designed Legoclothes, it opened theme parks that cost $125m to build and lost $25m in their firstyear. It built its own video games company from scratch, the largest installation ofsupercomputers in northern Europe, despite having no experience in the field.Lego’s traditional construction brick-based products still sold, but the company’sattempts to be relevant in an age of video games saw Lego ‘over-innovate’,spreading itself too thinly and launching so many new initiatives that the companylost its sense of identity.‘We are on a burning platform,’ Lego’s new CEO Jorgen Vig Knudstorp toldcolleagues in 2004. ‘We’re running out of cash… [and] likely won’t survive’. Lego’ssurvival and subsequent revival has been called the greatest turnaround inAppendix© The Open Polytechnic of New Zealand 271338/Appendixcorporate history. A book devoted to the subject has become a set business text.Sony, Adidas and Boeing refer to it, and Google uses Lego bricks to help itsemployees innovate.Lego’s rebirth is largely due to Jorgen Vig Knudstorp’s interventions as CEO. Hisfirst phase of recovery began by making several key moves: improving processes,cutting costs, and managing cash flow.The second phase saw a removal of the areas of business which Lego had limitedexpertise in such as the loss-making Legoland parks. Knudstorp also slashed theinventory, halving the number of individual pieces Lego produces from 13,000 to6,500.The third phase: stabilisation and organic growth required figuring out what themodern Lego should look like, which Knudstorp accomplished in part by investing ina kind of research the company had never done before: deep studies of howchildren around the world really play.From 2008 to 2010 Lego’s profits quadrupled and to date it has become a profitgenerating, design-driven miracle built around premium, intuitive, covetablehardware. So much so, the British Toy Retailers Association voted Lego the toy ofthe century.Knudstorp literally rescued Lego by methodically rebuilding it, brick by brick. Therevival of the brick is just one aspect, and Knudstorp encouraged interaction withLego’s fans. The internet has played a vital role, and far from killing off Lego, hasallowed fans to share their creations and even promote events such as ‘Brickworld’,Lego’s adult fan convention. Other initiatives saw Lego launch its owncrowdsourcing competition: originators of winning ideas get 1% of their product’snet sales. Lego also started making hit toys again. As well as putting a focus backon classic Lego lines like City and Space, it launched the ninja-themed Ninjago lineand Mindstorms, kits that build programmable Lego robots that are aimed at teens.So how does Lego achieve customer insights and continued success?Future Lab: a secretive and highly ambitious group of 50 employees who formLego’s R&D team and who are charged with inventing entirely new, technologicallyenhanced ‘play experiences’ for children all over the world. Lego is reputed toconduct the largest ethnographic study of children in the world to gain insight intoits new products. As Knudstorp puts it, ‘It’s about discovering what’s obviouslyLego, but has never been seen before.’At Future Lab, Lego has developed a range of low-risk, low-cost innovationpractices to test ideas, prototype rapidly and cultivate expertise. Prototyping is not© The Open Polytechnic of New Zealand 371338/Appendixalways fast though. Lego Friends took four years of research plus a $40m globalmarketing push to get right. For a company with a customer base that in 2011 was90% boys, it has finally cracked the girls’ market. Lego ‘Friends’ centres on fivecharacters in a fictional Heartlake City.‘One of the main things was [girls] couldn’t really relate to the Minifigure,’ saysMauricio Affonso, Friends’ model designer. ‘It’s too blocky. Boys tend to be a lotmore about good versus evil, whereas girls really see themselves through the Minidoll. They wanted a greater level of detail, proportions and realism.’Lego Friends sets (bakery, amusement park, riding camp, and so forth) tend tofeature something else missing from boys’ sets: a toilet. The boys don’t care, butgirls’ pragmatism demanded it.Behind the innovation, Lego’s quality control and precision are rigorous. The bricksmust be strong enough to hold together, but not so strong they can’t easily be pulledapart by a child. Lego call it ‘clutch power’. It is a huge industrial process, withplants in Denmark, Hungary, China and Mexico. Factories are located close to keymarkets. Most companies make a product where it’s cheapest, then ship it. NotLego.All of this represents the company’s increasing reliance on its own intellectualproperty. Licensing deals still flourish with cartoon characters, Star Wars and HarryPotter. Knudstorp says, ‘but they contribute no more of our business than about athird, they’re on a list of about 10 things that drive the growth of the company’.From all this Lego has learned several things:• Innovation without direction is risky.• Innovate close-to-the-core first.• Experiment and test ideas in a safe way, without damaging brand reputation;start with small projects and small budgets, then test, learn and prove.• Disrupt yourself. Build the next big thing before a competitor does.• Foster open innovation and listen to the wisdom of customers.• Build an innovation culture that gives people freedom to be creative, as wellas the direction and focus needed to deliver profitable innovation.What is Lego’s ultimate goal? Is it growth for growth’s sake?As a privately held company, Lego has no need to demonstrate anything to marketsor shareholders. Since Lego only has one group of shareholders, namelyChristiansen’s heirs, Knudstorp only worries about their two official objectives.These are that Lego continues to:© The Open Polytechnic of New Zealand 471338/Appendix1. create innovative play experiences, and2. reach more children every year.’They are not pushing us very hard on the financial target,’ he insists. What they likeabout, say, Lego Friends is that we’re engaging more children. Lego views growth asone testimony of whether they’re sufficiently innovative.In 2015, the still privately owned, family-controlled Lego Group overtook Ferrari tobecome the world’s most powerful brand. It announced profits of £660m, making itthe number one toy company in Europe and Asia, and number three in NorthAmerica, where sales topped $1bn for the first time.Today, Lego may know as much about the subject of how children play as anyorganisation on earth. Knudstorp says, ‘There’s the famous quote that if you want tounderstand how animals live, you don’t go to the zoo, you go to the jungle. TheFuture Lab has really pioneered that within Lego, and it hasn’t been a theoreticalexercise. It’s been a real design-thinking approach to innovation, which we’velearned an awful lot from’.Adapted from:Davis, J. (2017, June 4). How Lego clicked: the super brand that reinvented itself.The Guardian. https://www.theguardian.com/lifeandstyle/2017/jun/04/howlego-clicked-the-super-brand-that-reinvented-itselfRingen, J. (2015, August 1). How Lego became the Apple of toys. Fast Company.https://www.fastcompany.com/3040223/when-it-clicks-it-clicksThe Leadership Network. (2016, November 7). 5 sustainable innovation practicesthat saved LEGO. https://theleadershipnetwork.com/article/lego-sustainableinnovation
